Gloomy clouds rolled in late last year in the form of a government shutdown; U.S. – China trade war tensions; hawkish Federal Reserve interest rate policies; a continued special counsel investigation by Robert Mueller into potential Russian election interference; a change in the Congressional balance of power; Brexit deal uncertainty; and U.S. recession concerns, among other worries. These fear factors contributed to a thundering collapse in stock prices during the September to December time frame of approximately -20% in the S&P 500 index (from the September 21st peak until the December 24th trough).

However, the dark storm clouds quickly lifted once Santa Claus delivered post-Christmas stock price gains that have continued through February. More specifically, since Christmas Eve, U.S. stocks have rebounded a whopping +18%. On a shorter term basis, the S&P 500 index and the Dow Jones Industrial Average have both jumped +11.1% in 2019. January showed spectacular gains, but last month was impressive as well with the Dow climbing +3.7% and the S&P +3.0%.

The rapid rise and reversal in negative sentiment over the last few months have been aided by a few positive developments.

Strong Earnings Growth: For starters, 2018 earnings growth finished strong with an increase of roughly +13% in Q4-2018, thereby bringing the full year profit surge of roughly +20%. All else equal, over the long run, stock prices generally follow the path of earnings growth (more on that later).

Solid Economic Growth: If you shift the analysis from the operations of companies to the overall performance of the economy, the results in Q4 – 2018 also came in better than anticipated (see chart below). For the last three months of the year, the U.S. economy grew at a pace of +2.6% (higher than the +2.2% GDP [Gross Domestic Product] growth forecast), despite headwinds introduced by the temporary U.S. federal government shutdown and the lingering Chinese trade spat. For the full-year, GDP growth came in very respectably at +2.9%, but critics are dissecting this rate because it was a hair below the coveted 3%+ target of the White House.

Source:The Wall Street Journal

A More Accommodative Federal Reserve: As mentioned earlier, a major contributing factor to the late-2018 declines was driven by a stubborn Federal Reserve that was consistently raising their interest rate target (an economic-slowing program that is generally bad for stocks and bonds), which started back in late 2015 when the Federal Funds interest rate target was effectively 0%. Over the last three years, the Fed has raised its target rate range from 0% to 2.50% (see chart below), while also bleeding off assets from its multi-trillion dollar balance sheet (primarily U.S. Treasury and mortgage-backed securities). The combination of these anti-stimulative policies, coupled with slowing growth in major economic regions like China and Europe, stoked fears of an impending recession here in the U.S. Fortunately for investors, however, the Federal Reserve Chairman, Jerome Powell, came to the rescue by essentially implementing a more “patient” approach with interest rate increases (i.e., no rate increases expected in the foreseeable future), while simultaneously signaling a more flexible approach to ending the balance sheet runoff (take the program off “autopilot).

Source:Dr. Ed’s Blog

The Stock Market Tailwinds

For those of you loyal followers of my newsletter articles and blog articles over the last 10+ years, you understand that my generally positive stance on stocks has been driven in large part by a couple of large tailwinds (see also Don’t Be a Fool, Follow the Stool):

#1) Low Interest Rates – Yes, it’s true that interest rates have inched higher from “massively low” levels to “really low” levels, but nevertheless interest rates act as the cost of holding money. Therefore, when inflation is this low, and interest rates are this low, stocks look very attractive. If you don’t believe me, then perhaps you should just listen to the smartest investor of all-time, Warren Buffett. Just this week the sage billionaire reiterated his positive views regarding the stock market during a two hour television interview, when he once again echoed his bullish stance on stocks. Buffett noted, “If you tell me that 3% long bonds will prevail over the next 30 years, stocks are incredibly cheap… if I had a choice today for a ten-year purchase of a ten-year bond at whatever it is or ten years, or– or buying the S&P 500 and holding it for ten years, I’d buy the S&P in a second.”

#2) Rising Profits – In the short-run, the direction of profits (orange line) and stock prices (blue line) may not be correlated (see chart below), but over the long-run, the correlation is amazingly high. For example, you can see this as the S&P 500 has risen from 666 in 2009 to 2,784 today (+318%). More recently, profits rose about +20% during 2018, yet stock prices declined. Moreover, profits at the beginning of 2019 (Q1) are forecasted to be flat/down, yet stock prices are up +11% in the first two months of the year. In other words, the short-term stock market is schizophrenic, so focus on the key long-term trends when planning for your investments.

Source:Macrotrends

Although 2018 ended with a gloomy storm, history tells us that sunny conditions have a way of eventually returning unexpectedly with a boom. Rather than knee-jerk reacting to volatile financial market conditions after-the-fact, do yourself a favor and create a more versatile plan that deals with many different weather conditions.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (March 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

P.S.

Wade’s Investing Caffeine Podcast Has Arrived!

Wade Slome, founder of Sidoxia Capital Management, author of How I Managed $20 Billion Dollars by Age 32, and lead editor of the Investing Caffeine blog has launched the Caffeine Corner investment podcast.

The Investing Caffeine podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

“Investing Caffeine is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics. The blog articles and podcasts provide opinions, not advice.”

Investors were cheerfully dancing last month after the stock market posted its best January in 30 years and the best monthly performance since October 2015 (see chart below). More specifically, the S&P 500 index started the year by catapulting +7.9% higher (the best January since 1987), and the Dow Jones Industrial Average climbed 1,672 points to 25,000, or +7.2%. But over the last few months there has been plenty of heartburn and volatility. The December so-called Santa Claus rally did not occur until a large pre-Christmas pullback. From the September record high, stocks temporarily fell about -20% before the recent jolly +15% post-Christmas rebound.

Source:FactSet via The Wall Street Journal

Although investors have been gleefully boogying on the short-run financial dance floor, there have been plenty of issues causing uncomfortable blisters. At the top of the list is China-U.S. trade. The world is eagerly watching the two largest global economic powerhouses as they continue to delicately dance through trade negotiations. Even though neither country has slipped or fallen since the 90-day trade truce, which began on December 1 in Buenos Aires, the stakes remain high. If an agreement is not reached by March 2, tariffs on imported Chinese goods would increase to 25% from 10% on $200 billion worth of Chinese goods, thereby raising prices for U.S. consumers and potentially leading to further retaliatory responses from Beijing.

When it comes to the subjects of intellectual property protection and forced technology transfers of American companies doing business in China, President Xi Jinping has been uncomfortably stepping on President Donald Trump’s toes. Nothing has been formally finalized, however Chinese officials have signaled they are willing to make some structural reforms relating to these thorny issues and have also expressed a willingness to narrow the trade deficit with our country by purchasing more of our exports. Besides procuring more American energy goods, the Chinese have also committed to buy 5,000,000 tons of our country’s soybeans to feed China’s hungry population of 1.4 billion people.

Reaching a trade settlement is important for both countries, especially in light of the slowing Chinese economy (see chart below) and the dissipating stimulus benefits of the 2018 U.S. tax cuts. Slowing growth in China has implications beyond our borders as witnessed by slowing growth in Europe as evidenced by protests we have seen in France and the contraction of German manufacturing (the first time in over four years). Failed Brexit talks of the U.K. potentially leaving the European Union could add fuel to the global slowdown fire if an agreement cannot be reached by the March 29th deadline in a couple months.

Source:Wind via The Wall Street Journal

While the temporary halt to the longest partial federal government shutdown in history (35 days) has brought some short-term relief to the 800,000 government workers/contractors who did not receive pay, the political standoff over border security may last longer than expected, which may further dampen U.S. economic activity and growth. Whether the hot-button issue of border wall funding is resolved by February 15th will determine if another shutdown is in the cards.

Despite China trade negotiations and the government shutdown deadlock placing a cloud over financial markets, brighter skies have begun to emerge in other areas. First and foremost has been the positive shift in positioning by the Federal Reserve as it relates to monetary policy. Not only has Jay Powell (Fed Chairman) communicated a clear signal of being “patient” on future interest rate target increases, but he has also taken the Fed off of “autopilot” as it relates to shrinking the Fed’s balance sheet – a process that can hinder economic growth. Combined, these shifts in strategy by the Fed have been enthusiastically received by investors, which has been a large contributor to the +15% rebound in stock prices since the December lows. Thanks to this change in stance, the inverted yield curve bogeyman that typically precedes post-World War II recessions has been held at bay as evidenced by the steepening yield curve (see chart below).

Source:Calafia Beach Pundit

Other areas of strength include the recent employment data, which showed 304,000 jobs added in January, the 100th consecutive month of increased employment. Fears of an imminent recession that penetrated psyches in the fourth quarter have abated significantly in January in part because of the notable strength seen in 4th quarter corporate profits, which so far have increased by +12% from last year, according to FactSet. The strength and rebound in overall commodity prices, including oil, seem to indicate any potential looming recession is likely further out in time than emotionally feared.

Source:Calafia Beach Pundit

As the chart above shows, over the last four years, spikes in fear (red line) have represented beneficial buying opportunities of stocks (blue line). The pace of gains in January is just as unsustainable as the pace of fourth-quarter losses were in stock prices. Uncertainties may remain on trade, shutdowns, geopolitics, and other issues but don’t throw away your investing dance shoes quite yet…the ball and music experienced last month could continue for a longer than expected period of time.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (February 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Last month turned out to be a memorable one for stock market investors, but unforgettable for many of the wrong reasons. Santa Claus left more dark coal than shiny gifts, judging by the -9.2% correction last month in the S&P 500 index, making it the worst December since 1931. Overall, the damage for the year was much more palatable, down -6.2% for the 12-month period. This result contrasts with the +9.5% gain in 2016, +19.4% gain in 2018, and +276.0% gain achieved since the March 2009-low.

If I were to compare 2017 and 2018 to an amusement park, 2017 was more like a calm train ride (slow, smooth, and steady), while 2018 was more like a rollercoaster (fast, and rocky with lots of ups and downs). Stock market history tells us that on average stock prices should fall -5% three times per year and -10% one-time per year. Well, 2017 was like a walk in the park if you consider there were no -5% or -10% dips during the year, whereas in 2018, we had -12% and -20% corrections, before bouncing somewhat during the last week of the year. Rollercoaster rides can be fun, but if the bumpy ride lasts too long, park visitors will likely need a sick sack.

The heightened level of volatility can be seen in the Fear Gauge or the Volatility Index – VIX (see chart above), which has been bouncing around like a spiking cardiogram in response to the following news headlines:

Government Shutdown

Global Trade (China)

Federal Reserve Interest Rate Policy

Mueller Investigation

New Balance of Power in Congress

Brexit Deal Uncertainty

Recession Fears

While there have been some signs of slowing growth in key areas like automobile and home sales, the overall economy has been doing quite well on the back of consumer spending, which accounts for upwards of 70% of our country’s economic activity (see GDP chart below). In fact, recently released Mastercard consumer retail holiday spending data grew +5.1% to a record level exceeding $850 billion.

Corporations, which are also helping propel continued growth in our $20 trillion economy, are producing record profits, as you can see from the chart below. This in turn has led to an amazingly low unemployment rate of 3.7%, the lowest jobless figure posted in 49 years.

Overall, economic fundamentals may remain strong, but in the face of the positive data points, fears of an impending recession overpowered the good news last month, resulting in stock prices that are much more attractively valued right now. For example, if you are shopping at a department store, it’s much more advantageous for the buyer to purchase items on sale versus paying full price. Or as the most successful investor of all-time, Warren Buffett, famously notes, “Be fearful when others are greedy and greedy only when others are fearful.” And recently, investors have been very fearful. As you can see from the chart below, prices as measured by the Price-Earnings ratio (P/E) are below the long-term, multi-decade average. This fact is even more relevant in light of the historically low inflation and interest rates (10-Year Treasury Note at 2.69%). Unsurprisingly, during the 1970s and early 1980s, double digit interest rates and inflation were relatively high leading to low, single digit P/E stock ratios over many years.

Just because stock prices went down last month, does not mean they cannot go even lower. However, the rollercoaster ride experienced in recent months, coupled with the fresh turn of the calendar year, provide investors a perfect opportunity to revisit their asset allocation and potentially rebalance your portfolios to meet your long-term objectives and constraints. More attractive equity prices improves the timing of this exercise. Regardless, the adrenaline-filled ups and downs may be feel scary now, but the ride will be more enjoyable if you buckle up don’t lose sight of your long-term goals.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 4, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

As we enter the last month of the year, the holiday season is kicking into full gear, decorations are popping up everywhere, and the burning question arises, “Will Santa Claus bring gifts for stock market investors, or will he leave a lump of coal in their stockings?”

It was a bumpy sleigh ride last month, but we ultimately entered December in a festive mood with joyful monthly gains of +1.7% in the Dow Jones Industrial Average, and +1.8% in the S&P 500. There have been some naughty and nice factors leading to some turbulent but modest gains in 2018. For the first 11 months of the year, the Dow has rejoiced with a +3.3% advance, and the S&P 500 has celebrated a rise of +3.2% – and these results exclude additional dividends of approximately 2%.

Despite the monthly gains, not everything has been sugar plums. President Trump has been repeatedly sparring with the Federal Reserve Chairman, Jerome Powell, treating him more like the Grinch due to his stingy interest rate increases than Santa. As stockholders have contemplated the future path of interest rates, the major stock indexes temporarily slipped into negative territory for the year, until Mr. Powell gave stock and bond investors an early Christmas present last week by signaling interest rates are “just below” the nebulous neutral target. The dovish comment implied we are closer to the end of the economy-slowing rate-hike cycle than we are to the beginning.

Trade has also contributed to the recent spike in stock market volatility, despite the fresh establishment of the trade agreement reached between the U.S., Mexico, and Canada (USMCA – U.S.-Mexico-Canada Agreement), a.k.a., NAFTA 2.0. Despite the positive progress with our Mexican and Canadian neighbors, uncertainty surrounding our country’s trade relations with China has been challenging due to multiple factors including, Chinese theft of American intellectual property, cyber-attacks, forced technology transfer, agricultural trade, and other crucial issues. Fortunately, optimism for a substantive agreement between the world’s two super-powers advanced this weekend at the summit of the Group of 20 nations in Argentina, when a truce was reached to delay an additional $200 billion in tariffs for 90 days, while the two countries further negotiate in an attempt to finalize a comprehensive trade pact.

Source: Financial Times

Economic Tailwinds

Besides positive developments on the interest rate and trade fronts, the economy has benefited from tailwinds in some other important areas, such as the following:

Low Unemployment: The economy keeps adding jobs at a healthy clip with the unemployment rate reaching a 48-year low of 3.7%.

Solid Economic Growth: As the chart below indicates, the last two quarters of economic growth, measured by GDP (Gross Domestic Product), have been running at multi-year highs. Forecasts for the 4th quarter currently stand at a respectable mid-2% range.

Although the majority of economic data may have observers presently singing “Joy to the World,” the uncertain political weather forecast could require Rudolph’s red-nose assistance to navigate the foggy climate. The mid-term elections have created a split Congress with the Republicans holding a majority in the Senate, and the Democrats gaining control of the House of Representatives. As we learned in the last presidential term, gridlock is not necessarily a bad thing (see also, Who Said Gridlock is Bad?). For instance, a lack of government control can place more power in the hands of the private sector. Political ambiguity also surrounds the timing and outcome of Robert Mueller’s Special Counsel investigation into potential Russian interference and collusion, however as I have continually reminded followers, there are more important factors than politics as it relates to the performance of the stock market (see also, Markets Fly as Media Noise Goes By).

From an economic standpoint, some speculative areas have been pricked – for example the decline in FAANG stocks or the burst of the Bitcoin bubble as the price has declined from roughly $19,000 from its peak to roughly $4000 today (see chart below).

Source: Coindesk

On the housing front, unit sales of new and existing homes have not been immune to the rising interest rate policies of the Federal Reserve. Nevertheless, as you can witness below, housing prices remain at all-time record high prices, according to the recent Case-Shiller data.

I like to point out to my investors there is never a shortage of things to worry about. Even when the economy is Jingle Bell Rocking, the issues of inflation and Fed policy inevitably begin to creep into investor psyches. While prognosticators and talking heads will continue trying to forecast whether Santa Claus will place presents or coal into investors’ stockings this season, at Sidoxia we understand predictions are a fool’s errand. Regardless of Santa’s generosity (or lack thereof), we continue to find attractive opportunities for our investors, as we look to balance the risk and rewards presented to us during both stable and volatile periods.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (December 3, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

The interest rate boogeyman came out in October as fears of an overzealous Federal Reserve monetary policy paralyzed investors into thinking rising interest rates could murder the economy into recession. But other ghostly issues frightened the stock market last month as well, including mid-term elections, heightening trade war tensions, a weakening Chinese economy, a fragile European economy (especially Italy), rising oil prices, weakening emerging market economies, anti-Semitism, politically motivated bomb threats, and anxiety over a potential recession after an aged economic expansion embarks on its 10th consecutive year of gains.

This ghoulish short-term backdrop resulted in the Dow Jones Industrial Average suffering a -5.1% drop last month, and the technology-heavy NASDAQ index screamed even lower by -9.2%. The results for the full year 2018 look more constructive – the S&P 500 is up +1.4% and the NASDAQ has climbed +5.8%.

Should the dreadful October result be surprising? Historically speaking, seasonality in the stock market has been quite scary during the month of October, especially if you consider the spooky stock Market Crash of 1929 (-19.7%) , the 1987 Crash (-21.5%), and the bloody collapse during the October 2008 Financial Crisis (-16.8%). There is good news, however. Seasonally, the holiday months of November and December typically tend to treat investors more cheerfully during the so-called “Santa Claus Rally” period. Since 1950 through 2017, the average return for stocks during November has been +1.4% (45 up years and 23 down years). For December, the results are even better at +1.5% (51 up years and 17 down years).

November (1950-2017)

December (1950-2017)

Up Years

Down Years

Up Years

Down Years

2017 2.40%

2015 -0.02%

2017 1.08%

2015 -1.87%

2016 3.29%

2011 -0.32%

2016 1.76%

2014 -0.33%

2014 2.45%

2010 -0.44%

2013 2.31%

2007 -0.76%

2013 2.68%

2008 -7.48%

2012 0.70%

2005 -0.10%

2012 0.28%

2007 -4.18%

2011 0.86%

2002 -6.03%

2009 5.74%

2000 -8.01%

2010 5.99%

1996 -2.15%

2006 1.66%

1994 -3.93%

2009 1.48%

1986 -2.83%

2005 3.52%

1993 -1.29%

2008 1.65%

1983 -0.87%

2004 3.86%

1991 -4.39%

2006 1.26%

1981 -3.01%

2003 0.71%

1988 -1.89%

2004 3.25%

1980 -3.39%

2002 5.71%

1987 -8.51%

2003 5.08%

1975 -1.15%

2001 7.52%

1984 -1.51%

2001 0.76%

1974 -1.78%

1999 1.92%

1976 -0.78%

2000 0.41%

1969 -1.87%

1998 5.91%

1974 -5.32%

1999 5.78%

1968 -4.16%

1997 4.46%

1973 -11.39%

1998 5.64%

1966 -0.15%

1996 7.34%

1971 -0.25%

1997 1.57%

1961 -0.32%

1995 4.10%

1969 -3.41%

1995 1.74%

1957 -3.31%

1992 3.03%

1965 -0.88%

1994 1.26%

1990 6.00%

1964 -0.52%

1993 0.98%

1989 1.65%

1963 -1.05%

1992 1.01%

1986 2.15%

1956 -3.10%

1991 11.19%

1985 6.51%

1951 -0.95%

1990 2.48%

1983 1.74%

1950 -0.26%

1989 2.14%

1982 3.60%

1988 1.48%

1981 3.27%

1987 7.28%

1980 10.24%

1985 4.51%

1979 4.26%

1984 2.24%

1978 0.61%

1982 1.50%

1977 2.86%

1979 1.68%

1975 2.47%

1978 1.16%

1972 4.56%

1977 0.28%

1970 4.74%

1976 5.25%

1968 4.80%

1973 1.79%

1967 0.75%

1972 1.18%

1966 0.31%

1971 8.62%

1962 10.16%

1970 5.68%

1961 3.77%

1967 2.63%

1960 2.97%

1965 0.90%

1959 1.52%

1964 0.39%

1958 1.78%

1963 2.44%

1957 3.17%

1962 1.35%

1955 7.64%

1960 5.08%

1954 7.71%

1959 2.03%

1953 0.41%

1958 4.78%

1952 4.31%

1956 1.50%

1955 0.29%

1954 5.85%

1953 0.12%

1952 3.47%

1951 3.62%

1950 3.81%

While the last 31 days may have been distressing, at Sidoxia we understand that terrifying short-term volatility is a necessary requirement for long-term investors, if you desire the sweet appreciation of long-term gains. Fortunately at Sidoxia our long-term investors have benefited quite handsomely over the last 10 years from our half-glass-full perspective. The name Sidoxia actually is derived from the Greek word for “optimism” (aisiodoxia).

Performance has been fruitful in recent years, but the almost decade-long bull market has not been all smooth sailing (see Series of Unfortunate Events), as you can see from the undulating 10-year chart below (2008-2018). Do you remember the Flash Crash, Debt Ceiling, Greek Crisis, Arab Spring, Crimea, Ebola, Sequestration, and Taper Tantrum, among many other events? Similar to the volatility experienced in recent weeks, all these aforementioned events caused scary downdrafts as well.

The S&P 500 hit a low of 666 in March 2009, but even with the significant fall last month, the stock market has more than quadrupled in value to 2,711 today.

The compounding benefits of long-term investing are quite evident over the last decade when you consider the record profits of the stock market. Compounding benefits apply to individual stocks as well, and Sidoxia and its clients have experienced this first hand through ownership in positions in stocks like Amazon.com Inc. (+2,692% in 10 years), Apple Inc. (+1,324%), and Google (parent Alphabet) (+507%), and many other less-familiar growth companies have allowed our client portfolios and hedge fund to outperform their benchmarks over longer periods of time. Although we are proud of our long-term performance, we have definitely had periods of under performance, and there will come a time in which a more defensive stance will be required. However, panicking is very rarely the best course of action when you are talking about your long-term investment strategy. Staying the course is paramount.

During periods of heightened volatility, like we experienced in October, the importance of owning a broadly diversified portfolio across asset classes (including stocks, bonds, real estate, commodities, emerging markets, growth, value, etc.) is worth noting. Of course an asset allocation should be followed according to a risk tolerance appropriate for your unique circumstances. As financial markets and interest rates gyrate, investors should get in the practice of rebalancing portfolios. For example, at Sidoxia, we are consistently harvesting our gains and opportunistically redeploying those proceeds into unloved areas in which we see better long-term appreciation opportunities. This whole investment process is designed for reducing risk and maximizing returns.

As in some famously scary stock market periods in the past, October turned out to be another frightening month for investors. The good news is that we have seen this scary movie many times in the past, and we have lived to tell the tale. The economy remains strong, corporate profits are at record levels and still rising, consumer and business confidence levels are near all-time highs, and interest rates remain historically low despite the Fed’s gradual interest rate hiking policy. While Halloween has definitely worried many investors, history tells us that previous tricks may turn into holiday treats!

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL, AMZN, GOOGL, and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

If the world were indeed in the process of ending and we were looking down into the abyss of another severe recession, we most likely would not see the following tangible and objective facts occurring in our economy.

New Revamped NAFTA (North American Free Trade Agreement) 2.0 trade deal between the U.S., Mexico, and Canada was finalized (new deal is called United States-Mexico-Canada Agreement).

Leading Economic Indicators are at a record high (a predictive statistic that historically falls before recessionary periods – in gray)

Are we closer to a recession with the stock market potentially falling 20-30% in value? As I have written on numerous occasions, so-called pundits have been falsely forecasting recessions over the last decade, for as long as this bull market has been alive (see Professional Double-Dip Guesses are “Probably” Wrong).

Why so much investor angst as stock prices continue to chug along to record levels? One reason is investors are used to historically experiencing a recession approximately twice a decade on average, and we have yet to suffer one since the Great Recession around 10 years ago. While the mantra “we are due” for a recession might be a true statement, the fact also remains that this economic recovery has been the slowest since World War II, which logically could argue for a longer expansionary period.

What also holds true is that corporate profits already experienced a significant “profit recession” during this economic cycle, post the 2008-2009 financial crisis. More specifically, S&P 500 operating profits declined for seven consecutive quarters from December 2014 through June 2016. The largest contributors to the 2014-2016 profit recession were collapsing oil and commodity prices, coupled with a rapid appreciation in the value of the U.S. dollar, which made our exports more expensive and squeezed multinational corporation profits. The stock market eventually digested these profit-crimping headwinds and resumed its ascent to record levels, but not before the S&P 500 remained flat to down for about a year and a half (2014-2016).

Doom-and-gloom, in conjunction with toxic politics, continue to reign supreme over the airwaves. If you want in on a beneficial dirty little secret, you and your investments would be best served by ignoring all of the media noise and realizing the world is not going to end any time soon.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in TSLA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

The S&P 500 eclipsed the 2,900 level and the NASDAQ jumped over 8,000 this month – both all-new record highs. The Dow Jones Industrial average also temporarily catapulted above 26,000 in August, but remains 2% shy of the January 2018 record highs. For the year, here are what the gains look like thus far:

S&P 500: +5.3% (2,902)

NASDAQ: +17.5% (8,110)

Dow Jones Industrial: +5.0% (25,965)

For months, and even years, I have written how investors have underestimated the strength of this bull market, which has been driven by an incredible earnings growth, low interest rates, reasonable valuations, and a skeptical mass market of investors. As I pointed out in the article, Why the Masses Missed the 10-Year Bull Market, stock ownership has gone down during this massive quadrupling in the bull market. And many investors have missed the fruits of the bull market due to an over-focus on uncertain politics and scary headlines.

Nothing lasts forever, however, so another correction will likely be in the cards, just as we experienced this February when the S&P 500 index temporarily fell -18% from the January peak. But as I have highlighted previously, attempting to forecast or predict a correction is a Fool’s Errand. At Sidoxia we implement a disciplined, systematic process to identify attractive investments through our proprietary S.H.G.R. model (see also Holy Grail) and the four legs of our macroeconomic framework (earnings, interest rates, valuation, and investor sentiment – see Follow the Stool). With stock prices bouncing around near record highs, it is surprising to some that anxiety still remains elevated, primarily due to polarizing politics and an unfounded fear of an imminent recession.

Despite all the hand wringing going on over political headlines, the fact remains the economic tailwinds have “trumped” any political concerns. After a strong Q2 GDP reading of +4.2%, according to numerous economists, Q3 is tracking for another healthy +3% gain. As the Leading & Coincident Indicator chart shows below, there currently is no sign of an imminent recession.

And jobs remain plentiful in part because of Small Business Optimism (see chart below). It’s common knowledge that small businesses generate the vast majority of new jobs, so these optimism levels hovering near 35-year highs augur well for future hiring, job growth, and investment.

The real economy, as measured by the shipment of goods, is trucking along as well (see the truck tonnage chart below).

While all the positives above have been highlighted already, in the forefront has been an endless string of doomsday forecasts. Scott Grannis captured this sentiment in a six-year chart created by TradeNavigator.com (click here).

As we enter the tenth year of this bull stock market, politics remain polarizing and skepticism reigns supreme. However, until the storm clouds come rolling in, the economy keeps expanding and prices keep moving higher. If the trend continues, as has been the case in recent years, next month’s title could be the same, “Another Month, Another Record.”

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (September 4, 2018). Subscribe on the right side of the page for the complete text.

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